For the third time in a month, China has moved to try and cool the economy and control inflation.
The People’s Bank of China raised the reserve requirement ratio for its banks by a half-percentage point on Friday, the second such move in 10 days. It came after the bank lifted interest rates in a surprise move on October 19.
The central bank also increased the reserve requirement ratio by the same amount (0.50%) on November 10.
But China’s central bank didn’t move interest rates, which saw some markets in Asia perk up as there had been talk of a rate rise, with the size put at 0.25% to a massive 0.75%.
The People’s Bank of China said the move was aimed at "enhancing liquidity management and moderately regulating credit supply."
The increase was estimated to freeze liquidity of about 300 billion Yuan (44.8 billion U.S. dollars).
The announcement was made after trading on the stockmarket finished for the day and week.
The Shanghai Composite Index rose 0.8%, cutting the week’s decline to 3.2% after a 4.6% slide last week (and over 5% on Friday week ago).
The reserve requirement ratio (RRR) for the four big state-owned banks — the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China — will rise to 18.5% after this latest move.
Friday’s move will raise the deposit reserve ratio for other large financial institutions to 18% and for small and medium-sized institutions to 16%.
The AMP’s chief economist, Dr Shane Oliver wrote on the weekend.
"While the merits of price controls can be debated, to the extent that China is relying on targeted administrative measures to control inflation it may help take pressure of blunter less targeted measures such as interest rate hikes.
"However, Friday’s hike in the banks’ required reserve ratio – the fifth this year – highlighted that macro tightening is still very much on the agenda in China.
"The increase in the reserve ratio is necessary to mop up the increase in the money supply being generated by the current account surplus and the managed exchange rate.
"We still anticipate a few interest rate hikes and a further increase in the banks’ required reserve ratio going forward, but remain of the view that they will not be aggressive enough to crunch the Chinese economy," Dr Oliver wrote.
It follows the decision of China’s State Council last Wednesday to introduce a range of measures to control prices and boost output.
The State Council decided that it would stabilize prices for grain, oil, sugar and cotton in particular.
The statement said the Council’s measures would aim to increase the supply of commodities, especially food, that have driven inflation to a 25-month high.
It also vowed to intensify a crackdown on price speculation and to punish those found hoarding commodities and pushing up prices by illegal means.
"We need to understand the importance and urgency of stabilizing market prices and take forceful measures," the statement said.
Further measures were being announced over the weekend.
The crackdown and mooted controls have been rumoured since late last week when the CPI for October revealed a sharp jump in the cost of living in October.
The CPI jumped 0.7% from, September to an annual rate of 4.4%, driven by a 10.1% rise in food prices in the month.
Food prices are up 62.5% in the past year, according to Chinese reports this week.
The latest move from the central bank comes as a Chinese government think tank has forecast a further slowing in the country’s rate of economic growth this quarter.
According to various media reports the State Information Centre said China’s economic growth rate was likely to slow in the fourth quarter to 8.7%, mainly as a result of economic restructuring (which is affecting the coal and power industries, as well as steel, cement and the metal smelting and refining sectors.
This forecast is almost 1 percentage point lower than the third quarter’s 9.6% and compared with the 11.9% rate in the first quarter.
The SIC expects the economy to grow by 10% for the full year.
The SIC is a think tank under the National Development and Reform Commission (NDRC), so its forecast has a semi-official status.
The SIC forecast China’s industrial production would continue growing fast in the fourth quarter, but at a slower pace of 11.6% year on year, compared with 13.5% for the third quarter, 15.9% in the second quarter and 19.6% in the first quarter.
